ICICI Bank, the country’s largest auto financier, and HDFC, the No 1 in housing finance, raised their lending rates by 0.75 percentage point each, reports Sumant Banerji. Should you still buy a car?

Jabraj Singh, a 27-year-old manager with Tata Projects, Hyderabad, has fancied owning a Maruti SX4 since the midsize sedan was launched last year.

On Thursday, his hopes were dashed as the country’s leading banks announced another hike in interest rates.

ICICI Bank, the country’s largest auto financier, and HDFC, the No 1 in housing finance, raised their benchmark lending rates by 0.75 percentage point each. Others are expected to soon follow suit.

“I’ve deferred my purchase to next year, hoping that interest rates would be moderated by then,” says Singh, already battling a spike in the monthly payout on a 5-year education loan he had taken two years ago. His EMI on that loan, linked to a floating rate, has increased from Rs 10,000 to Rs 13,500.

For now, Singh has decided to stick to his second-hand Royal Enfield. “I’d rather wait for my salary to go up further, before I can go for my dream car,” he said.

The sharp spike in lending rates over the past year has forced aspiring car buyers like Singh to defer their purchases, often linked to availability of finance.

Car finance rates for a five-year tenure — that’s what is most common among middle class buyers — currently average at 13.8 per cent. Following Thursday’s announcement, these could touch as high as 15 per cent, almost double the level prevailing four years ago.

With inflation staying high, further interest hikes by banks and monetary authorities are not ruled out. “Rates will go up in future and continue to be high at least in the near term,” said Ravi Narayanan, head, car and commercial vehicle loans ICICI Bank.

That’s bad news for the auto industry, already battling rising input costs. “Owning a car becomes less affordable and interest rates impact the compact car segment more as they are more price sensitive,” said Arvind Saxena at Hyundai Motor. “We will see a slowdown and can only hope that rates comes down soon.”